Courtesy of Scott Martindale, Senior Managing Director
The past few days have given us a wild ride in the markets, thanks primarily to unrest in the Middle East. After this extended run since December 1, I have been waiting for the market to decide between either pulling back to consolidate gains and find a strong support point from which to launch on a renewed bullish run … losing critical support and turning bearish.
Looking at the SPY chart, Friday gave us a big red candle and a scary break of both the uptrend line and 20-day moving average that I was waiting for, after a long period in which it barely tested them. Then, for the first time in two months, RSI reached back down to the neutral line, where I was looking for it to either bounce or continue to cycle down to oversold territory, while the MACD was only just starting its decent from overbought. As it has turned out, RSI has bounced strongly. Price stabilized on Monday and then gapped higher today, pushing the Dow and S&P500 to heights they haven’t reached in over two years. RSI and MACD have been turned back up sharply, as well, and we might be seeing something of a bullish “cup & handle” pattern.
I was hoping for more weakness this week to shake out some of the weaker momentum holders and give the market a firmer foundation from which to continue its rally, but with the dollar cratering and industrial production up, investors took it as a green light to scoop up stocks now rather than later (and risk missing out). I have been suggesting that a pullback would likely be shallow and short lived, but this one was awfully quick. I’m not so sure that’s all we’re going to get.
The market volatility index (VIX) closed today at 17.63 after spiking over 20 on Friday, and the TED spread (i.e., indicator of credit risk measuring the difference between the 3-month T-bill and 3-month LIBOR interest rates) is at 16.34, which is up only slightly since last week. Both indicators remain relatively low and still reflect complacency (and investor optimism).
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